Analyst Insight: The past couple of decades have seen a globalization of supply chains. This has heightened the importance of the supply chain to overall operations, but it has also come with increased risk and security requirements. As a result, the role of supply-chain finance has increased in importance, and is a critical area moving forward.
Companies have increasingly leveraged global opportunities to enhance their operations. Low-cost country sourcing, labor arbitrage, and global trade agreement optimization are all been strategies being used by companies to increase profits and sustain growth. In addition, there has been an increase in the reliance on supply-chain operations to manage the associated risks.
Alongside the supply-chain organization, finance has increased its focus on the impact and exposure that businesses face due to instabilities from political and economic disruption. Whether it’s a trade war, geopolitical turbulence, or risks from other factors such as natural disasters, there’s more risk in the supply chain than ever before.
The trend has highlighted the need for supply-chain finance to be integrated within operations. Companies are finding it increasingly important to model and manage the financial impact of operations, both within and beyond their direct control.
This is a critical change for the relationship between supply chain and finance. Traditionally, the finance organization has engaged with supply chain on matters such as overall spend management, procurement savings realization, and supply-chain audits. Moving forward, this relationship will become increasingly interrelated, with a focus on global trade management and risk mitigation.
With the growing globalization of the supply chain, there has also been an increased need to better understand and manage the duty and customs implications of trade agreements. This element of the supply chain is highly complex, with multiple agreements potentially impacting every transaction. In addition, issues such as potential trade wars and value added tax (VAT) implications have heightened the need for closer integration between the supply chain and finance functions.
Supply-chain risk has increased exponentially with globalization. Normal oversight, through audits and compliance procedures, needs to be re-examined to take into consideration the increased risk of these operations. This need also heightens the requirement for an enhanced relationship between supply chain and finance.
There is great potential for companies to maximize the value of their operations by further imbedding a finance presence within their supply chains. Incorporating a supply-chain finance director or vice president, with oversight of all supply-chain financial impacts, will ensure that financial implications and risk mitigation are given appropriate visibility within the organization. This will allow the company to continue to explore supply-chain opportunities that maximize the value of operations, while protecting against downside risk.
Organizations that integrate a strong financial presence within their supply-chain operations allow themselves to take advantage of new opportunities, while better managing downside risk. There are certain capabilities around global trade management and risk mitigation which reside outside the traditional supply-chain organization. This requires the finance organization to be a strong partner to ensure that the supply chain, and the company overall, are successful in their endeavors.
Andy Prinz is Associate Partner of Supply Chain Management, and Jack Johnson is Principal of Supply Chain Management, with Infosys Consulting.